Stocks, yields and oil plunge, despite bumper US jobs report

It’s been another dreadful day for European stock markets, with the DAX taking out last month’s lows, while the FTSE 100 has slipped back to its lowest levels since July 2016.

As yields plunge across the world, the coronavirus has effected a stampede for the exits in the fashion of someone shouting 'fire' in a crowded theatre, as havens surge and yields plunge. This week’s market gyrations have been something to behold, with record low yields in bond markets set on a daily basis, signalling an investor community that is genuinely fearful of the potential economic hit this virus might have on company revenues and profit margins.

In a month where airline, travel and banking stocks had already had a bad start, we’ve seen these declines accelerate this week. There seems to be an increasingly inverse relationship between the rise in new cases of coronavirus being reported, to the speed of the falls in the share prices of stocks in these sectors, as fears about further sharp increases in cases weigh on investor sentiment.

The collapse of Flybe earlier this week, regardless of its pre-existing weaknesses, has concentrated minds on the part of investors as to how long airlines, travel companies and hotels will have in terms of riding out this disruption, and the potential long-term economic damage to their revenues streams, and future profit potential. Yesterday’s report from the International Air Transport Association (IATA) that airlines could lose up to $113bn of revenue this year will also have ripple effects to the wider industry of hotels, car hire and other ad-hoc consumer spending.

We’ve seen further big falls in the share prices of the large hotel chains, already feeling the impact of events in Hong Kong last year, now having to contend with a much larger hit to their global revenues streams as the coronavirus spreads its toxic tentacles across the world. Accor, as well as Intercontinental Hotels, owner of the ubiquitous Holiday Inn brand, has continued to decline today, and has seen its share price fall over 25% since the 21February.

Whitbread, owner of the Premier Inn brand, is also sharply lower, on concerns over a drop off in business bookings, as we look towards the spring and summer months. Carnival Cruise Lines is also lower, trading at seven-year lows after the US reported its second fatality from the Grand Princess cruise ship in San Francisco, and the company came under criticism for its handling of the health screening protocols on the ship.

The banking sector in Europe is also continuing to feel the heat. Yesterday Commerzbank hit a new record low, and the entire sector has continued to fall today as German yields fall even further into negative territory, setting fresh record lows, with the EStoxx Banks index heading back towards levels last seen at the height of the eurozone debt crisis in July 2012.

Metro Bank’s share price has continued to fall to new record lows, down sharply again this morning as investors continue to react to this week’s news of the departure of the company’s chief risk officer, Grahame McGirr, only two weeks into the role. The lack of transparency over the departure at a time when the bank is being investigated by regulators is not a good look for a bank where confidence in management is already quite low.

US

In a week where we’ve seen 4% daily swings in the value of US stocks, it’s been a sharply lower open for US markets, with investors taking their cues from both weak Asia and European sessions, against a back drop of concern that new virus cases in the US are likely to accelerate strongly in the days and weeks ahead.

Today’s US employment report and non-farm payrolls is almost a footnote to this week’s events, given that it gives a rear view mirror look of the US economy. The big unknown remains the effect on the US economy of a prolonged outbreak, and what that might do to consumer confidence and spending, and more importantly how that might affect the US jobs market.

February saw the US economy add 273,000 new jobs in February, an identical figure to January, which was revised up to 273,000, while wages rose at 3% on an annualised basis. The unemployment rate came in at 3.5%, still close to 50-year lows, and while this is all positive, the first signs of potential weakness are likely to manifest themselves in the weekly jobless claims numbers in the weeks ahead. A rise in jobless claims in the coming weeks will be the proverbial canary in the coalmine for any upcoming weakness in the US economy.

JP Morgan Chase shares have also slid back after this morning’s news that CEO Jamie Dimon underwent emergency heart surgery.

FX

The US dollar has continued to slide along with bond yields, falling to its lowest levels since July last week against a basket of currencies, with the biggest losses against the haven currencies of the Swiss franc and Japanese yen. It’s been an awful week for US yields with the US 10-year sliding from last weeks close at 1.1485% to as low as 0.69% at the time of writing, a colossal 45bp decline in the space of a week. With an upper Fed funds rate at 1.25% the entire US yield curve, including the 30-year yield has now slipped below the upper bound.

Today’s payrolls numbers, on a normal day, would have been an enormous positive for the US dollar, however with the market so preoccupied with the potential for an economic shock from coronavirus, the numbers were dismissed. Today’s numbers were also completely at odds with this week’s 50bp emergency rate cut. Did the Fed act too hastily this week, because even with a virus related economic slowdown this week’s emergency cut still speaks to me of a panicked reaction.

Commodities

The slide in oil prices also continued, with Brent crude slipping back to levels last seen in 2017, below $47 a barrel, after Russia walked out of the latest OPEC meeting, saying that they would prefer to wait until June before agreeing to any further cuts in production. While Middle Eastern countries are more anxious about a weaker US dollar impacting their finances, the slide of the greenback against the rouble appears to be cushioning the impact on Russia’s revenues.

Gold prices hit a new high this year and their highest level since 2013, as investors continue to price in the prospect of further US rate cuts and possible economic turmoil in the weeks ahead.

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